The Star-Ledger

Exelon Pulls Plug On PSEG Merger

Regulatory barriers kill huge utility deal

The Star-Ledger — Friday, September 15, 2006

BY TOM JOHNSON
Star-Ledger Staff

Exelon yesterday walked away from its $17 billion acquisition of Public Service Enterprise Group, balking at concessions sought by New Jersey regulators.

After the stock market closed, Exelon of Chicago and PSEG of Newark announced they were terminating the transaction, ending more than 20 months of arduous efforts to create what would have been the largest electrical power supplier in the country.

PSEG shares fell as much as 10 percent in after-hours trading.

After the deal collapsed, PSEG, operator of Public Service Electric & Gas, the state's largest utility, sought to reassure investors about its future as an independent company. CEO E. James Ferland said its business outlook is one of the more positive in the company's history.

Analysts said other companies are likely to consider bidding for PSEG, but the long, costly and failed effort by Exelon and PSEG to win regulatory approval could deter possible suitors.

"You'd have to be insane for a company to try and buy Public Service," said Paul Fremon, an analyst with Jefferies & Co., adding that the process in New Jersey is simply too time-consuming and too contentious.

The collapse of the deal wasn't a huge surprise given a continuing stalemate in settlement discussions. On Aug. 30, Exelon issued a cautionary statement that completion of the deal "is no longer more likely than not."

The collapse poses big challenges for PSEG, which has seen its work force decline by 1,200 since the deal was announced in December 2004. It also raises uncertainty about the future of PSEG's nuclear power plants in South Jersey, which have been run by Exelon with few problems under an interim agreement that expires in January but can be extended.

In the end, the two sides couldn't agree on the economics of the deal – how many dollars would be set aside to reduce consumers' electric and gas bills and how they would sell power from the plants they would retain if the deal was approved.

The deal is the first ever to fail to win approval from the New Jersey Board of Public Utilities, a development all the more surprising given the enormous influence and sway exercised by PSEG, owner of the state's biggest gas and electric utility, which has been around for more than a century. It spent $75 million during the past two years to win approval of the deal, according to proxy filings.

While the deal had been approved by various federal agencies and state regulators, the transaction sparked intense opposition in New Jersey from consumer advocates, manufacturers and others who feared the combined company would be so big it could sway power prices in region, sharply boosting energy bills for ratepayers and businesses.

Public Advocate Ronald Chen said the companies wouldn't agree to measures dealing with how they would price power from their generating plants "to ensure that the merged company could not manipulate regional energy markets and drive up statewide energy costs."

The sides also were far apart on money issues. The state had sought a package totaling $820 million in benefits to help defray rising energy bills and to fund energy assistance and other programs while the companies had offered a package valued at roughly $600 million. The two sides also couldn't agree on how to settle two pending gas and electric rate cases, involving nearly $200 million a year.

"There was just a gap there," said Victor Fortkiewicz, the BPU executive director who led negotiations for the agency. "The economic and market power issues were very difficult."

The most contentious issue in the case involved market power and whether the combined company would have a free hand to raise electricity rates. The companies agreed to sell off six power plants under agreements with two federal agencies. But the state insisted they sell another two units and agree to limit the prices they would charge for other units after the sale was complete.

Ferland said the benefits of the combination were chipped away by the requirements to divest power plants and other concessions sought by the BPU.

"By the time we started looking at the proposal by the board, we're better off as a standalone company than if we had completed the merger," he said.

Analysts said the deal was complicated by the rapid rise in the past few years in power prices, which have been driven up by increases in the natural gas that fuels many plants in the region. "It wouldn't have been as contentious if the unregulated wholesale power market had not risen so much," said Paul Patterson, an energy analyst with Glenrock Associates.

Most people involved in the case were happy to see the deal die, even unions that had initially signed on but had become wary about how of selling of a half-dozen power plants would affects their members.

"This is good for employees, good for our members and good for the customers," said Chip Gerrity, president of Local 94 of the International Brotherhood of Electrical Workers, which represents 3,200 Public Service employees.

Consumer advocates were also elated. "New Jersey ratepayers struggling with high energy costs have a huge weight lifted off their shoulders," said Suzanne Leta, energy advocate for the New Jersey Public Interest Research Group.

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